Molina Healthcare Inc (MOH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, Welcome to the Molina Healthcare year-end 2010 earnings call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder the conference is being recorded, Thursday, February 17, 2011.

I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations.

Hello everyone and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2010.

The Company's earnings release reporting its result was issued today after the market closed and is now posted for viewing on our Company website.

On the call with me today are Dr. Mario Molina, our Chief Executive Officer; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks we will open the call to take your questions.

Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our guidance for 2011. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report, our Form 10-Q quarterly reports, and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab of our Company website or on the SEC's website.

All of the forward-looking statements made during today's call represent our judgment as of February 17, 2011, and we disclaim any obligation to update such statements.

This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the Company's website at MolinaHealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Thank you Juan Jose. Welcome everyone and thank you for joining us today. It has been just three weeks since we provided a comprehensive review of our business and operations at our Investor Day in New York City. Therefore, I will keep my remarks brief so that John can review some of the financial highlights for the quarter and the year, and then open the call for your questions.

2010 was a very good year for Molina Healthcare. We achieved strong financial results and great operational execution. We grew revenue and enrollment, increased our EBITDA, as well as our net income, and continued to generate strong operating cash flow.

It was also a very strong year for Molina strategically, as we invested in our future by entering the Medicaid information or fiscal agent business through our acquisition from Unisys of its health information management business.

We now operate that business under the name Molina Medicaid Solutions. This acquisition provides another platform for growth to complement the growth that is expected in our Medicaid health plan business over the next few years.

I am pleased about the direction we have chosen and about the breadth and depth of the services portfolio that we are now bringing to the Medicaid market.

Moving onto our results, the fourth quarter was better than anticipated, and it was consistent with the trends we shared with you at our Investor Day. The general operational performance and cash flow at our health plans with strong, led by our four largest health plans, California, Michigan, Ohio and Washington.

Of course, there are always challenges, particularly in new markets. In Florida, for example, medical costs remain volatile and elevated. As Terry pointed out at our Investor Day, the volatility in the medical care ratio at this health plan is caused in part by its low membership.

Florida is one of our newest markets and has considerably lower enrollment than our more mature health plans. The issues we face in Florida are some of the same issues we faced during the beginning stages of operations of our Ohio health plan. We are implementing in Florida some of the same initiatives that helped lower medical costs in Ohio.

Our Wisconsin health plan faces similar issues. Wisconsin is our newest health plan, and with only 36,000 members, it is even smaller than our Florida health plan. There are still many opportunities to grow our marketshare in Wisconsin, as the health plan market remains fragmented.

As we experienced in Michigan, fragmentation can provide some in-state acquisition opportunities or may force less efficient competitors out of the market.

Speaking of new markets, Molina Medicaid Solutions contributed about $3 million in operating income since we acquired the business on May 1, 2010. However, the unit reported an operating loss of about $4 million in the fourth quarter. The operating loss for the fourth quarter was a result of system stabilization costs in Idaho and Maine. We continue to make progress in these states, and have also begun to work on re-procurements in Louisiana and West Virginia.

I am also pleased to announce that in addition to Norm Nichols' appointment as President of Molina Medicaid Solutions, Dr. Jim Howatt, who has been serving as Chief Medical Officer for the Molina Health Plans, will be transitioning to a new role as Medical Director for Molina Medicaid Solutions.

As the MMS Medical Director, Dr. Howatt will serve as the clinical leader for existing and future MMS product offerings, and will work closely with Norm to incorporate coordination solutions into the government healthcare programs served by MMS.

Now I would like to turn your attention to Texas. As of this moment the state of Texas has yet to release the final RFP. We remain optimistic about the opportunity to increase our marketshare in Texas. The successful implementation of our new contracts for the Texas CHIP Rural Service Area Program and the Dallas STAR+PLUS program provide us with additional momentum in Texas.

Implementation of the CHIP program resulted in a membership gain of nearly 54,000 new members in September of 2010. Our contract for the Dallas STAR+PLUS program for ABD beneficiaries effective on February 1, 2011, contributed nearly 32,000 additional ABD members.

We continue to focus on quality. In the first quarter of 2010 Molina Healthcare of Florida earned a quality accreditation from the National Committee on Quality Assurance, or NCQA. This brings the number of Molina healthcare plans that are accredited by NCQA to 8. To our knowledge, there is no other Medicaid health plan organization in the country with as many NCQA accreditations as Molina Healthcare.

Organizations that want to participate in the new state healthcare insurance exchanges in 2014 will need to have some form of accreditation. Looking to 2011, we expect to continue investing in the business as we pursue growth opportunities, as well as continue to build on our momentum and the financial achievements in 2010.

Demonstrating healthcare value to our members, our providers, and the government agencies with which we contract, will remain one of our top priorities. Now I would like to turn the call over to John.

Thank you, Mario, and good afternoon or evening to everyone. As Mario pointed out, this was a very good quarter and a very good past year for Molina Healthcare. In addition to the fourth-quarter and year-end results we are releasing today, there are only a few updates beyond what we had disclosed at our Investor Day on January 26. I encourage you to view that investor presentation as it provides a great update on our business, our outlook for 2011, and a first glimpse of our outlook for 2012.

Let me review today's results. Net income for the quarter ended December 31, 2010, was approximately $18 million or $0.58 per diluted share, compared with a loss of $5 million or $0.18 per diluted share for the same period last year. Net income for the full year was $55 million or $1.98 per diluted share compared with net income of $31 million or $1.19 per diluted share for 2009.

2010 was a year of accomplishment and growth at Molina, as evidenced by our results today. In addition to our financial objectives, we remain committed to meeting the needs of our members and the government programs that serve them.

Premium revenue for the fourth quarter was $1 billion, up $80 million or approximately 8% from the fourth quarter of 2009. For all of 2010 premium revenues increased by $330 million or 9% to $4 billion. This revenue increase is primarily due to our membership growth and not because of premium rate increases. As we discussed previously, Medicaid rate increases have been minimal and are expected to remain low.

Please refer back to our January Investor Day presentation where we detailed our expectations for state-by-state premium rate changes.

We view EBITDA, earnings before interest, taxes, depreciation and amortization, as an excellent metric to access business performance. EBITDA grew in 2010 by $76 million or 84% when compared to 2009. The reconciliation to GAAP financial measures and the methodology behind the EBITDA calculation can be found on page 8 of our earnings release.

Lower interest rates remain a substantial drag on our net income. Investment income decreased to $6 million in 2010 compared with $9 million in 2009. That decrease alone reduced EPS by almost $0.07 when compared to 2009.

Our medical care ratio decreased to 82.7% in the fourth quarter of 2010 compared to 87.5% in the fourth quarter of 2009. This is mainly due to lower fee-for-service costs.

For all of 2010 our medical care ratio decreased to 84.5% compared to 86.8% in 2009. The H1N1 flu epidemic had a marked impact on our 2009 medical care costs. The flu had little impact on our 2010 fourth-quarter results, but it is still too early to comment on its impact on the first quarter of 2011.

General and administrative expenses grew to 9.3% of total revenue in the fourth quarter of 2010 compared with 8% of total revenue for the fourth quarter of 2009. This increase is the result of higher administrative expenses for the Health Plans segment, driven in part by the cost of the Company's Medicare operations, where enrollment more than doubled between the end of 2009 and the end of 2010, higher compensation expense as a result of substantially improved financial performance in 2010, and the acquisition of Molina Medicaid Solutions.

Days of claims payable in the fourth quarter were 42 days, which was flat on a sequential basis compared to the third quarter.

Positive operating cash flow for 2010 was $162 million for the year and $153 million for the quarter. The Company had cash and investments of approximately $814 million, including restricted investments. Our parent company had free cash and investments of approximately $65 million.

Moving onto guidance. We are reaffirming our guidance discussed at our Investor Day on January 26, 2011. A complete discussion of our assumptions and risk factors can be found in our Investor Day presentation available on our website.

Finally, at our Investor Day back in September of 2007 we shared with you some of our long-term goals. Those goals included achieving revenues of $4 billion by the end of 2010, growing our ABD enrollment, growing our Medicare enrollment and providing healthcare services on a fee basis. I am happy to report that we have achieved all of these goals.

Our 2010 revenues have indeed reached $4 billion. Our ABD enrollment has grown to 150,000 members, and our Medicare enrollment has grown to more than 24,000 members. Finally, our acquisition and launch of the Molina Medicaid Solutions business has marked our entry into providing services on a fee basis. At Molina we continue to articulate and then achieve long-term strategic goals.

This conclude our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions). Josh Raskin, Barclays Capital.

First question, just, I guess, on Florida. I know new state, low membership and you guys talked about some of the corrective actions. And clearly we were asking the same exact questions about Ohio and we have seen the improvement. So I am just curious, do you have sort of an expectation for a Florida MLR or even a timing as to when you would see at least a more normalized MLR range?

I think our target is less. I don't mean to be funny, but with a small enrollment it is volatile. So we would expect as we continue to grow the business, continue to gain some scale in the market, we can continue to drive better provider contracts. We are closer with our providers to work on utilization and bring it down.

It is going to be a function, in large part, on how well we can -- and fast we can grow the business. And then also if there is any rate changes -- positive rate changes that the state gives us. I think last year, as you may recall, we had a slight decrease in the rates.

So maybe I will ask another question. 95%, that is not sustainable. You guys can't run that forever. So at what point do you guys think about, okay, we don't have scale, we need to either increase scale or exit the market or start thinking more serious. Is it one rate cycle? Is it two rate cycles? How should we think about Florida?

I think you think about Florida the way we think about Ohio. It is an important state for us to be in. It took us a while to get the medical costs down in Ohio, but clearly from a strategic standpoint it was the right thing to do. And I think that strategically it is important for us to be in the Florida market. So we are going to continue to work on bringing those costs down and to grow our enrollment.

Second question, just on MMS, could you maybe help us with the seasonality of earnings -- quarterly earnings for that book of business? But obviously that hasn't been -- 2010 wasn't a normal year, so it is tough, and we didn't see a first quarter last year, so how should we think about the earnings contribution from MMS next year?

It is Joe speaking. We have not observed notably any kind of seasonality in the MMS business the way you would observe seasonality in our HMO business. Obviously at sometimes of the year you can have more claims than others, but we don't see anything that pronounced.

What we had talked about though is with the new contracts in Maine, and particularly Idaho, the timing of the start of revenue recognition. So once Maine had begun revenue recognition in 2010, once Idaho begins revenue recognition in 2011, you're going to see an increase in earnings. And that is one reason why, if you will recall back in New York when we spoke to what we called seasonality of earnings it was loaded toward the backend.

Right, okay. So just stick with -- you gave us some revenue targets for the second half versus first half (multiple speakers) so stick with that?

Yes, yes.

Okay, and then just last question, I am sorry. The tax rate was a little bit higher than we had expected. Was there anything in it -- was it just more income in higher tax states or was anything else do it?

I would just express it as just the usual end of the year true-ups in terms of credits we thought we could take versus credits we thought we could have gotten, deductible expenses, nondeductible expenses, nothing unusual.

Okay, thanks guys.

Chris Rigg, Susquehanna.

Thanks for taking my question, guys. Obviously, a very strong cash flow quarter here, and some fairly sizable changes in working capital. I was wondering if you could highlight some of the moving parts there, and what led to significant changes sequentially?

It is Joe speaking again. I think the biggest issue out there is simply California catching up on their premium payments in the fourth quarter. You'll recall in the third quarter we had very bad cash flow, because California had its budget crisis and was delaying payment. So the simplest matter was just California catching up.

Okay. And then a bigger picture question. You have seen some states apply for waivers to reduce eligibility. Arizona is one state in particular. At this point in time do you view any of the moving parts in the states around the nation as having a material impact on you guys in terms of eligibility reductions?

This is Mario. I would say no at this point.

Okay. Then the last thing, I guess do you guys have any sense for Georgia and when we might have an update out of the state with regard to their RFP?

Again this is Mario, and the answer is also no.

Okay. All right, thanks a lot.

Tom Carroll, Stifel Nicolaus.

A question on Ohio. A very large decrease in the MLR year-over-year. And I read your prepared comments in the press release, but I was wondering if you could give us a bit more color there on the 13 percentage point decline in MLR?

Then, secondly, just again on the MMS business, I wonder if you could elaborate on what system stabilization costs are, and if you expect them to continue into first quarter of this year?

Let's take the second question first. I think we are still doing stabilization for Idaho, to a lesser extent Maine, but it is continuing on. I think that Joe talked about this in New York that we thought it would trail off -- towards the end of the second quarter it should be over with.

As far as Ohio goes, it is a combination of a lot of hard work getting the provider contracts in place and the utilization, especially ER utilization, down in Ohio, combined with we did get a rate increase that helped.

This is Mario. Let me just add that I think another thing that has helped us year-over-year has been the absence of the H1N1 flu epidemic, which did have an adverse affect on our medical costs across the board last year in all the states.

Okay, great, thanks.

John Rex, JPMorgan.

Just on G&A, so I think that Health Plans segment administrative -- that line item, the $72 million line item, that was up $15 million sequentially. How much of that was -- was that mostly incentive comp? I'm trying to think about a run rate going forward and how that was impacted by the incentive comp accruals.

It is Joe speaking. If you look back to the guidance we put out in New York, I think we said approximately 8.4% going forward. And that is what we are anticipating going forward into the new year. So what you have seen this quarter was essentially an anomaly.

So what was the $15 million sequential increase?

Certainly incentive comp was a big piece of it. Acquisition costs (multiple speakers). I am sorry?

Incentive comp, like what percentage of that would it be?

I don't really want to go into that in this call right here. It is a substantial portion of it, as were acquisition costs with Abri. And the typical year-end costs of Medicare where we had the open enrollment preparation where we are putting out open enrollment materials and that kind of thing.

So those are not -- the Medicare line item you have up above, that doesn't encompass that, the $9 million?

It would encompass that, yes, it would.

So that is not part of the $15 million? I am just trying to get a (inaudible) here. I am not quite sure why.

I am sorry, you're not quite sure why what?

Okay, maybe you just [don't have] anything to say about it. It just seems like you -- I was just trying to understand the $15 million sequential move, and I guess I come away still not understanding it. Can you just -- is it just incentive comps, should we just assume that is it?

I wouldn't assume that is it. As Joe said, we did have issues related to the Abri acquisition and integration. And also there is probably some spillover on the MMS side because we are not quite as adept as we would like to be in segregating those costs.

So, for example, as we are moving payroll over from MMS to the Molina system, those costs are probably just going to be buried in the Health Plans segment because that is where most of the corporate folks are.

Okay, I will move on. So when you think about January, any trends you're seeing in the claims runs data that you would be seeing so far that suggests different trends than you saw in the 4Q, or is it more of the same?

I think that it is really too early to comment much on January or 2011 in general. We did put out our guidance a couple of three weeks ago and as of right now we are sticking by it.

Okay, so -- just so I understand that, does that mean you don't really have a view on January claims runs or what you have seen would just be in line with how you guided?

We are here to talk about 2010 fourth-quarter and year-end. I really don't want to get into 2011 at this point.

Why not?

John, last point. It is Joe speaking. It is fair to say I don't think I have ever seen a January that told what the story was going to be for the year, positive or negative.

Okay, thanks.

Carl McDonald, Citigroup.

There has been a little bit of give and take between the state of California and the plans on what the rates will be for the Aged, Blind and Disabled expansion. Does that put the -- I had thought you were thinking about sort of a midyear timeframe on the expansion there. Does that put that at risk or is that still on track at this point?

As far as you know the enrollment is still on track.

Okay. And the 12,000 [less] that you talked about, is the expectation that will all come on a specific date, or is it that it comes in on a monthly rolling basis?

Monthly rolling basis.

Then last question, the West Virginia RFP that you mentioned you were working on, is that for a health plan or is that MMIS?

MMIS.

Scott Green, Banc of America - Merrill Lynch.

Thanks for the question. So first just thinking about the MLR overall, it doesn't look like there was much prior period development in the period. And so now the 2011 MLR guidance is supposed to be up 210 basis points from a 4Q jumping off point.

So I was curious would you highlight maybe any sort of intra-year favorable development that would cause some of the run rate MLRs you reported in the fourth quarter to not really be reflective of a run rate?

I think that the fourth-quarter MLR was probably more affected by a lack of flu season as compared to 2009 than is indicative of a trend going forward.

So I think, as Mario said, we did benefit from a light flu season. There was virtually no H1N1. And at some point we're going to see an uptick in utilization because there is going to be flu season coming back.

Okay, but ex flu would there be any sort of seasonality between third quarter and fourth quarter?

Third quarter tends to be our lowest MCR and fourth quarter starts to tick back up. Historically the first quarter then the medical costs continue to rise from fourth quarter, and then start heading back down in the second quarter. So we are following historic pattern here.

It is Joe speaking. I think the point about 2011 too is, bear in mind we are talking -- we have talked about the ABD lives in Texas and California. We expect those to run a little bit higher than our traditional consolidated medical care ratio. We talked about that in New York.

You're also going to have the full impact of a year of Michigan -- I'm sorry, a year of Wisconsin, which you can see from these results, it is also running higher than consolidated MCR. So I think expectations for 2011 are a combination of mix and anticipation of a less favorable flu season at the highest level.

Understood. On Ohio, you are about to get a rate increase January 1, is that right? You were talking about rate increase, but normally Ohio rates are effective 1/1. Is that still how it is here?

That's correct. If you go back to the presentation we did in New York a couple weeks ago we have Ohio at about 4%, 4.5% effective January 1.

Okay. Then in the news I saw today Michigan, Governor Snyder proposed integrating around 250,000 dual eligibles to managed care. I was curious what your thoughts are if there is support for an initiative like that in Michigan, and any idea what a PMPM could be?

Well, this is Mario. We have always advocated for the inclusion of the Aged, Blind and Disabled population in managed care. So we are certainly supportive of it. We think that this is a group that particularly benefits from the kinds of care management that can be applied through managed care programs.

Whether it will come to pass or not, it is, I think, too early to say. But we are certainly supportive of it. These are dual eligibles. And as you know, we have contracts in a number of states for the special needs plans to enroll dual eligibles through our Medicare and Medicaid contracts. So we are completely supportive.

Are there any other discussions that you're having with other states that were not on your growth drivers that you outlined at Investor Day, but one of your core markets like Ohio or any other states like that that might be more of an advanced stage considering moving more lives over?

Well, let me say this, I think that the message we give to states is all pretty much the same. We want to see the care integrated as much as possible. We want to include the elderly and the disabled beneficiaries. We want to bring in behavioral health and pharmacy benefits where possible, because we think that the more that we can coordinate the better off it is for the beneficiaries and the better it is going to be for the state budgets. So I think we are consistent in our message with all the states.

Then one last one, if I may. In Florida where there favorable benefits from provider recontracting in this quarter there were offset by even higher costs or have the provider recontracting efforts not flowed through yet to your MLR?

This is Terry Bayer. The recontracting efforts in Florida is ongoing. And late last year we got some traction on unit cost reduction. That is just rolling in continuing to flow.

I guess, if I could just add to that, I think though in terms of setting reserves at the end of the year, while we know we have some favorable contracts in place [are] improved, I don't think you're going to see the benefit of that in the fourth quarter -- per quarter.

All right, thank you.

(Operator Instructions). We have no further questions from the phones at the moment.

Well, that being the case, I just want to say it has been a very good year for Molina Healthcare. And it couldn't have happened without the cooperation of all of our staff, so I just want to publicly acknowledge and thank everyone for their hard work over the past year. And we look forward to speaking to you again next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.